SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIODFROM _____ TO _____ Commission File No. 0-14147 QUESTAR PIPELINE COMPANY (Exact name of registrant as specified in its charter) STATE OF UTAH 87-0307414 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 11450, 79 South State Street, Salt Lake City, Utah 84147 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 324-2400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock. Class Outstanding as of March 31, 1997 Common Stock, $1.00 par value 6,550,843 shares Registrant meets the conditions set forth in General Instruction H(a)(1) and (b) of Form 10-Q and is filing this Form 10-Q with the reduced disclosure format. PART I FINANCIAL INFORMATION Item 1. Financial Statements QUESTAR PIPELINE COMPANY STATEMENTS OF INCOME (Unaudited) 3 Months Ended 12 Months Ended March 31, March 31, 1997 1996 1997 1996 (In Thousands) REVENUES $26,721 $26,076 $104,823 $97,188 OPERATING EXPENSES Operating and maintenance 8,908 10,261 38,606 35,701 Depreciation 3,597 3,378 14,425 13,100 Other taxes 751 1,042 2,228 3,396 TOTAL OPERATING EXPENSES 13,256 14,681 55,259 52,197 OPERATING INCOME 13,465 11,395 49,564 44,991 INTEREST AND OTHER INCOME 5 544 1,259 597 INCOME (LOSS) FROM UNCONSOLIDATED AFFILIATES (68) 37 77 1,172 DEBT EXPENSE (3,351) (3,394) (13,373) (13,460) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 10,051 8,582 37,527 33,300 INCOME TAXES 3,729 3,331 13,813 12,144 INCOME FROM CONTINUING OPERATIONS 6,322 5,251 23,714 21,156 DISCONTINUED OPERATIONS - QUESTAR GAS MANAGEMENT COMPANY 1,139 356 3,608 NET INCOME $6,322 $6,390 $24,070 $24,764 See notes to financial statements QUESTAR PIPELINE COMPANY CONDENSED BALANCE SHEETS (Unaudited) March 31, December 31, 1997 1996 1996 (In Thousands) ASSETS Current assets Cash and short-term investments $220 $2,550 Notes receivable from Questar Gas Management 15,500 Accounts receivable $11,523 12,706 8,229 Inventories 2,373 2,332 2,301 Other current assets 1,953 1,817 1,938 Total current assets 15,849 32,575 15,018 Property, plant and equipment 561,025 547,776 562,711 Less allowances for depreciation 197,763 186,971 194,396 Net property, plant and equipment 363,262 360,805 368,315 Investment in discontinued operations 28,894 Investment in unconsolidated affiliates 14,279 9,121 14,347 Other assets 10,843 12,165 11,070 $404,233 $443,560 $408,750 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $752 Notes payable to Questar Corporation 4,000 $1,800 $11,800 Accounts payable and accrued expenses 17,033 21,373 14,823 Total current liabilities 21,785 23,173 26,623 Long-term debt 134,549 134,530 134,544 Other liabilities 4,197 4,920 4,322 Deferred income taxes 58,637 54,942 58,768 Common shareholder's equity Common stock 6,551 6,551 6,551 Additional paid-in capital 82,034 82,034 82,034 Retained earnings 96,480 137,410 95,908 Total common shareholder's equity 185,065 225,995 184,493 $404,233 $443,560 $408,750 See notes to financial statements QUESTAR PIPELINE COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 3 Months Ended March 31, 1997 1996 (In Thousands) OPERATING ACTIVITIES Net income $6,322 $6,390 Depreciation 3,891 3,839 Deferred income taxes (131) (1,207) Income from discontinued operation (1,139) Loss (income) from unconsolidated affiliates 68 (37) 10,150 7,846 Change in operating assets and liabilities (1,064) 9,222 NET CASH PROVIDED FROM OPERATING ACTIVITIES 9,086 17,068 INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (3,270) (1,047) Other investments Total capital expenditures (3,270) (1,047) Proceeds from disposition of property, plant and equipment 4,432 394 NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES 1,162 (653) FINANCING ACTIVITIES Decrease in note receivable from Questar Gas Management 1,192 Decrease in note payable to Questar Corporation (7,800) (13,400) Checks outstanding in excess of cash balances 752 Payment of dividends (5,750) (5,000) NET CASH USED IN FINANCING ACTIVITIES (12,798) (17,208) DECREASE IN CASH AND SHORT-TERM INVESTMENTS ($2,550) ($793) See notes to financial statements QUESTAR PIPELINE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS March 31, 1997 (Unaudited) Note 1 - Basis of Presentation The interim financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three-month period ended March 31, 1997, are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1996. Note 2 - Discontinued Operations - Gathering Division Spin Down and Transfer Questar Pipeline transferred approximately $55 million of gas-gathering assets to Questar Gas Management Company, a wholly owned subsidiary. The transfer was approved by the FERC February 28, 1996 and was effective March 1, 1996. Questar Gas Management was subsequently transferred to the nonregulated Market Resources group of Questar on July 1, 1996. The transaction was in the form of a stock dividend payable to Questar with no gain or loss recorded. Questar Pipeline's financial statements for prior periods were restated reflecting gas-gathering operations as a discontinued business segment. The Company submitted an application to the FERC to transfer approximately $1.5 million of additional facilities to Questar Gas Management. The facilities consist of several miles of non-mainline laterals, a portion of a mainline pipeline and a compressor station. The application requests that the transfer be effective May 31, 1997. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations QUESTAR PIPELINE COMPANY March 31, 1997 (Unaudited) Operating Results Following is a summary of financial and operating information for the Company: 3 Months Ended 12 Months Ended March 31, March 31, 1997 1996 1997 1996 (Dollars In Thousands) FINANCIAL RESULTS Revenues From unaffiliated customers $9,131 $8,087 $39,881 $35,883 From affiliates 17,590 17,989 64,942 61,305 Total revenues $26,721 $26,076 $104,823 $97,188 Operating income $13,465 $11,395 $49,564 $44,991 Income from continuing operations 6,322 5,251 23,714 21,156 OPERATING STATISTICS Natural gas transportation volumes (in thousands of decatherms) For unaffiliated customers 33,303 36,873 128,325 150,247 For Mountain Fuel 42,264 37,156 105,269 87,829 For other affiliated customers 6,816 4,598 46,545 37,211 Total transportation 82,383 78,627 280,139 275,287 Transportation revenue (per decatherm) $0.21 $0.21 $0.24 $0.23 Revenues were higher in the 1997 periods primarily due to a rate increase. Questar Pipeline filed for a rate increase for transportation and storage activities on July 31, 1995. A negotiated settlement of the case was approved by the Federal Energy Regulatory Commission (FERC) and became effective on February 1, 1996. The final rates included a stated return on equity of 11.75%. Operating and maintenance expenses decreased 13% in the first quarter of 1997 when compared to the first quarter of 1996 due primarily to reduced labor and related costs, non-recurring one-time charges from 1996 and some operating efficiencies. Operating efficiencies resulted from the consolidation of certain administrative, marketing, financial, technical and related services under Questar Regulated Services Co. These services were previously staffed and performed within each Questar Pipeline and its affiliated company, Mountain Fuel. Operating and maintenance expenses were 8% higher for the 12-month period ended March 31, 1997 when compared with the same period of 1996 primarily because of some one-time costs associated with the spin down of Questar Gas Management Company and settlement issues in the rate case. Depreciation expense was higher in the 1997 periods as a result of increased investment in property, plant and equipment. Interest and other income decreased in the first quarter of 1997 because of lower interest income. Loans made to Questar Gas Management were repaid at the time ownership was transferred. Other taxes were lower in the first quarter of 1997 when compared with the first quarter of 1996 primarily due to reduced payroll taxes as the number of employees has decreased from a year ago. Overthrust Pipeline Company, an unconsolidated affiliate of the Company, filed a request for a general rate increase on March 28, 1997. In the rate case, Overthrust is asking for a $6 million increase in revenues and an 11.9% return on equity. The FERC issued an order on April 30, 1997 accepting the filing and ordering a prehearing conference to take place by May 20. The new rates will become effective October 1, 1997 subject to refund. The effective income tax rate for the first quarter was 37.1% in 1997 compared with 38.8% in 1996. On May 9, 1997, the FERC issued an order alleging that Questar Pipeline had overcharged its affiliated company, Mountain Fuel, for gathering services provided from November 1988 through September 1992. The FERC order states that Questar Pipeline may have violated the Natural Gas Act by charging Mountain Fuel at rates different from those rates specified in the tariff. The FERC is ordering Questar Pipeline to show why the allegations are incorrect and why it should not refund the alleged overcharge of $3.4 million plus interest to Mountain Fuel. Questar Pipeline believes that it did not overcharge Mountain Fuel. Questar Pipeline also believes that its actions were justified and in good faith based on its understanding of the FERC's jurisdiction over gathering during the period in question. Management does not believe the ultimate outcome of this order will have a material impact on results of operations, financial position or liquidity. Liquidity and Capital Resources Operating Activities: Net cash provided from operating activities of $9,086,000 for the first three months of 1997 was $7,982,000 less than the amount provided during the first quarter of 1996. An increase in cash flow from net income was more than offset by increased use of cash in operating assets and liabilities. The Company experienced an increase in receivables and a decrease in accrued liabilities in the first quarter of 1997. The first quarter of 1996 included the collection of rates subject to refund. Investing Activities: Capital expenditures were $3,270,000 in the first three months of 1997 compared with $1,047,000 in the corresponding 1996 period. Capital expenditures for calendar year 1997 are estimated at $34,800,000. Financing Activities: The Company has a short-term line-of-credit arrangement with a bank totaling $200,000. In addition, Questar Corporation loans funds to the Company under a short-term arrangement. As of March 31, amounts borrowed from Questar were $4,000,000 in 1997 and $1,800,000 in 1996. No amounts were borrowed under the short-term line-of-credit arrangement at March 31, 1997. First quarter financing activities in 1997 and 1996 included payment of dividends and a partial repayment of the Company's notes payable to Questar. Capital expenditures for 1997 are expected to be financed from net cash flow provided from operations and borrowings from Questar. PART II OTHER INFORMATION Item 1. Legal Proceedings. On May 9, 1997, the Federal Energy Regulatory Commission (the FERC) issued an Order Instituting Proceedings to Questar Pipeline Company (Questar Pipeline or the Company). The order was issued after a preliminary investigation was conducted by the FERC's staff. It contains allegations that the Company may have violated a provision of the Natural Gas Act and its FERC tariff by charging gathering rates higher than the rates specified in its tariff to an affiliated customer, Mountain Fuel Supply Company (Mountain Fuel), for the period from November 1, 1988 through September 30, 1992. Specifically, the FERC is ordering Questar Pipeline to show why the allegations are not correct and why it should not be obligated to refund the amount of the alleged overcharge (approximately $3.4 million) plus interest to Mountain Fuel. Questar Pipeline believes that it did not overcharge Mountain Fuel. The Company believes that the gathering charges were justified and is fully consistent with its contractual commitments, FERC-approved rate settlements, and then-applicable FERC orders and judicial decisions concerning its gathering jurisdiction. The Company believes that rates charged to Mountain Fuel were designed and approved to provide Questar Pipeline the opportunity to recover its costs of providing gathering services to Mountain Fuel. Questar Pipeline will contest the allegations and emphasize that any gathering-rate issues were resolved by FERC-approved rate settlements that involved Mountain Fuel and the state agencies that monitor Mountain Fuel's rates. The Company transferred its gathering assets to Questar Gas Management Company, an affiliated entity, effective March 1, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUESTAR PIPELINE COMPANY (Registrant) May 14, 1997 /s/ D. N. Rose (Date) D. N. Rose President and Chief Executive Officer May 14, 1997 /s/ S. E. Parks (Date) S. E. Parks Vice President, Treasurer and Chief Financial Officer